Wednesday, June 16, 2010

From Energy & Capital:Estimates Based on Higher BPD, Modeled On Valdez Spill Size and Costs

As recently as June 10, London-based J.P. Morgan analyst Fred Lucas told clients that BP (NYSE: BP) is a screaming buy. But current "back of napkins" estimates employed by JPM and others to determine the scale and cost of the disaster are far too low, in my opinion.

Given what we've learned in the last month, I suspect that even current "high-end" estimates will look optimistic in hindsight. My own estimates are much higher than everything else I've seen. Of course, my numbers are really just guesses, like everyone elses. Naturally, I think my numbers are more accurate. With that out of the way, here is my analysis of the worst-case scenario for BP and the Gulf of Mexico.
J.P. Morgan's BP analyst is one of the few to venture a guess as to how much oil (total) will be leaked into the Gulf. So I applaud Mr. Lucas for putting the opinion out there, even though I disagree with his current conclusion.
The WSJ reports that the Mr. Lucas' "worse-case" estimate is 1.9 million barrels leaked into the Gulf, all told. (So does "worse-case" mean worse than the current estimates, or a worst-possible scenario? Could by a typo, could be legalese.)

With official barrel-per-day (BPD) rising from 0 bpd initially, to 1,000, to 5,000, to 12,000, to 19,000, to 30,000, all the way to the latest official estimate of 35,000 to 60,000 barrels per day, it seems unwise to assume the trend of increasing estimates will end at any given time (it should be noted that quotes from the JPM buy rec are from a June 10 interview in the WSJ).

My current worst-case scenario: 20 million barrels leaked into the Gulf, and $560 billion in damages. Let me explain how I arrived at that number.Update: As I was writing this piece, the official FRTG estimate jumped from 20,000-40,000 to 35,000-60,000.
The group in charge of official estimates, the Flow Rate Technical Group or FRTG, has been hesitant to give exact numbers and opinions of all scientists involved. (update above). I spoke with NOAA officials yesterday, and they would not comment on whether the previous 20k to 40k range was actually the low end of a broader range, rather than a median or consensus estimate. They did mention a new official estimate was out soon, but referred all questions on flow rates to the USGS and FRTG.

0 to 60,000 BPD, Will It Stop Here?
As far back as May 21st, a NYT editorial by independent experts said 100,000 bpd is certainly not out of the question. So it seems logical to include those numbers in a worst-case analysis....MORE